COMMODITY DATA MANAGEMENT
the principles for recognising and measuring financial instruments for firms that report their financial statements under the International Financial Reporting Standards (IFRS). From 1st
The objective of using a valuation technique is to estimate the January 2013, IFRS
13 (Fair Value Measurement) will be firmly established as the single source of guidance for fair value measurement. This will ensure the alignment
of definition and meaning of fair value and the same disclosure requirements about fair value measurements for US GAAP and IFRS.
Table 1: IFRS 13 The Fair Value Hierarchy Level 1
Level 2 Level 3 Source: IFRS The market approach is the most common approach used in As stated by IFRS; “IFRS 13 provides
clear and consistent guidance for measuring fair value and addressing valuation uncertainty in markets that are no longer active. It also increases the transparency of fair value measurements by requiring detailed disclosures about fair values derived using models” [our emphasis]. As noted in KPMG’s excellent
June 2011 paper on IFRS 13, they “… seek to reduce the subjectivity of these measurements by requiring the relevant observable inputs to be maximised and the unobservable inputs minimised.”
IFRS 13 Valuation Techniques IFRS 13 requires companies to
disclose information about the valuation techniques and inputs used to measure fair value, as well as information about the uncertainty inherent in fair value measurements (which was of particular concern during the global financial crisis).
60 June 2012
the commodity market and involves a mixture of Level 1 and Level 2 ‘fair value categorisations’, of which Level 2 requires the involvement of ‘bootstrapping’ techniques. This allows the application of synthetic pricing of OTC traded commodities to be formulated from or using market observable data by correlation or other statistical or inference techniques. However, a change in valuation technique or its application
(for example, a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example, any of the following events were to take place:
(a) new markets develop; (b) new information becomes available; (c) information previously used is no longer available; (d) valuation techniques improve; or (e) market conditions change.
Managing ‘Fair Value’ Measurement Assets You may have gleaned by now that recording, managing and
declaring ‘fair value’ is not an easy task and comes with the burden of ensuring compliance with international accountancy obligations and regulatory frameworks (such as EMIR in Europe and the US Dodd-Frank).
Quoted prices in active markets for identical assets and liabilities. Level 1 inputs must be used without adjustment whenever available.
Inputs not included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Unobservable inputs, including the entity’s own data, which are adjusted if necessary to reflect market participants’ assumptions.
price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants and the measurement date under current market conditions. IFRS 13 “… seeks to increase consistency and comparability in fair value measurements and related disclosures through a fair value hierarchy.” The hierarchy categorises the inputs used in valuation
techniques into three levels. It gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs [IFRS 13:72]. IFRS 13 states that; “Fair value is measured using the price in the principal market for the asset or liability (i.e. the market with the greatest volume and level of activity for the asset or liability) or, in the absence of a principal market, the most advantageous market for the asset or liability.” The actual valuation techniques used to measure fair value encompass the three approaches:
• Market Approach – uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business).
• Cost Approach – reflects the amount that would be required currently to replace the service capacity of an asset (current
replacement cost).
• Income Approach – converts future amounts (cash flows or income and expenses) to a single current (discounted)
amount, reflecting current market expectations about those future amounts.
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